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What is QIP in Stock Market?

What is a QIP?

QIP stands for Qualified Institutional Placement.

QIP in the stock market is a fundraising tool, whereby a company raises capital by issuing equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares.

The only parties eligible to purchase QIPs are Qualified Institutional Buyers (QIBs), which are accredited investors, as defined by the market regulator.

This limitation is due to the perception that QIBs are institutions with expertise and financial power that allows them to evaluate and participate in capital markets, without the legal assurances of a follow-on public offer (FPO).

Why Was QIP Introduced?

The complications associated with raising capital in the domestic markets have led many companies in the past to raise funds from foreign markets via Foreign Currency Convertible Bonds (FCCB) and Global Depository Receipts (GDR) to fulfil their needs.

To reduce dependence on foreign capital and to give a push to the domestic markets, the Indian stock market regulator launched QIPs in 2006.

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What are Some of the Rules Governing QIPs?

Some of the rules and regulations for a company to raise capital through a QIP are -

  • The company must be listed on a stock exchange along with the minimum shareholding requirements as specified in their listing agreement.
  • The company must issue at least 10% of its issued securities to mutual funds or allottees.
  • The company should ensure that there are at least two allottees if the size of the issue is up to Rs 2.5 billion and at least five allottees if the issue size is above Rs 2.5 billion.
  • No individual allottee is allowed to have more than 50% of the total amount issued.
  • Allottees must not be related in any way to promoters of the issue.

Several more regulations dictate who may or may not receive QIP securities issues.

Why Do Companies opt for QIP?

Now that we know bits and pieces of QIP, the question remains: Why do companies want to opt for QIPs?

Here are a few points answering this:

  • Apart from preferential allotment, QIP is the only other method of private placement whereby a listed company can issue shares or convertible securities to a select group of persons.
  • It does not involve many of the common procedural requirements such as the submission of pre-issue filings to the market regulator.
  • The QIP process saves time as access to capital is far quicker than through a follow-on public offer (FPO). The speedy process is because QIPs have far fewer legal rules and regulations to follow.
  • There are also fewer legal fees and there is no cost of listing overseas, making QIPs cost-efficient.

Which Companies Have Raised Capital through QIPs Lately?

Even as the covid-19 pandemic has hit businesses across the majority of the industries, Indian financial services businesses have been the most proactive in tapping the markets to raise funds.

Kotak Mahindra Bank raised Rs 74.5 bn through via QIP to reduce its promoter shareholding whereas ICICI Bank raised Rs 150 bn under its QIP to fund its business growth and meet regulatory capital requirements.

Canara Bank also raised Rs 20 bn through its QIP issue for augmenting its Tier I capital to support growth plans and to enhance its business.

So that was a quick guide to understanding the mechanics of QIPs.

We will keep you updated on upcoming QIPs and other developments from this space. Stay tuned.

Happy Investing!

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